The Texas Budget Battle: The Good, the Bad and — Well, at Least It's Not All Ugly

Continued scrutiny, coupled with a strong and resilient economy, should make Texans optimistic about the future, provided lawmakers effectively handle the pension question.

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The battle over Texas’ next two-year budget is underway.

On April 10 the House passed a $218 billion bill after debates over hot-button issues, including funding for school vouchers, an “alternatives to abortion” program, and even the federal border wall.

Texas’ solid financial position has begun to slip — at least relative to other states — so lawmakers should treat this process as a chance to shore things up.

In the upcoming 2017 edition of our annual state fiscal health rankings, to be published by the Mercatus Center at George Mason University this summer, Texas slides from 16th to 23rd in the nation.

Based entirely on the states’ own, often-overlooked financial reports, our study gives non-budget experts the opportunity to see where their governments stand.

Rankings are only relative, of course, so it’s more important to look at what goes into them. In this case, there is plenty of good and some bad news.

First, the good:

Since 2014, Texas has ranked in the top half among states. It operates with enough cash to pay its short-term bills.

Revenues usually exceed expenses and budgets are usually balanced. Texas’ $46 billion debt is manageable given the income of its residents.

Texas is on much better footing than other resource-rich states, even as the decline in oil prices has had a negative effect on state revenues.

Diverse revenue streams and economic diversification has helped Texas to avoid Alaska’s fate — where revenues fell from $2.9 billion in fiscal year 2014 to $513 million in 2015, enough to cover only 67 percent of Alaska’s expenses.

Lawmakers there are now considering establishing sales or income taxes and cutting popular spending programs.

More good news is that this year’s debates underscore what Texas’ financial statements still bear out: an ongoing commitment to fiscal prudence.

Take another controversial part of the House’s bill: the decision to dip into Texas’ flush, oil-and-gas-funded Rainy Day Fund.

It proposes using $2.5 billion (of a possible $10 billion) to help close the state’s $4 billion revenue shortfall.

Lt. Gov. Dan Patrick, the leader of the Senate, prefers to not use the fund for what he considers “ongoing expenses.”

No one likes a budget shortfall, but this is a good dilemma to have. With one of the the nation’s most robust Rainy Day Funds, Texas is well-poised to weather the average recession.

The House bill also axes a favored program of Gov. Greg Abbott — the Texas Enterprise Fund — which provides tax breaks to lure companies to set up shop in Texas.

Instead, it shifts the $43 million earmarked for corporate giveaways to child protective services.

Next, the bad news:

With each year, Texas’ unfunded pension obligation grows larger.

Its eight state-administered occupational plans have a total unfunded liability of $48.9 billion — roughly equal to four percent of the income of state residents.

But this figure is based on risky assumptions about plans’ future investment returns. When calculating it using guaranteed investment returns instead, it balloons to $342 billion.

Employee healthcare benefits add another $79.3 billion, making the combined liability about one-third of Texans’ incomes.

These numbers are bracing. While they don’t put Texas’ state pensions in the company of Illinois (or Dallas, for that matter), they point to the need for a clearer accounting.

New standards do require states to report their liabilities more accurately — and this is a factor in Texas’ slide in our rankings. These standards should make for better planning, but they don’t go far enough and continue to low-ball the full bill.

Texas’ reputation for fiscal responsibility is well deserved. As the year’s robust budget debates show, a culture of fiscal discipline remains intact.

This continued scrutiny, coupled with a strong and resilient economy, should make Texans optimistic about the future, provided lawmakers effectively handle the pension question.